RBI rate cut a boon for affordable housing investors

The recent move by the Reserve Bank of India (RBI) in its annual Credit Policy has given some hope for investors in the affordable housing segment. This is being seen as a positive development for the overall property market. While investors remain cautious and wait for banks to announce the lowering of interest rates, realtors are optimistic of the scenario, however, hoping that inflation remains under check.

"While the rate cut of 50 basis points is definitely a ray of hope, it does not dispel the shadows nearly as much as may be initially supposed. It should be borne in mind that the Reserve Bank of India (RBI) has hiked interest rates 13 times between March 2010 and October 2011," says Om Ahuja, CEO - Residential Services, Jones Lang LaSalle India.

"While this is understandable , given the ongoing concerns over inflation and liquidity in the market, the spate of rate hikes has created a compounded problem for the residential real estate sector. The series of hikes in the past have also affected the price that builders put on their properties, since their own costs of borrowing have increased. It is unlikely that property prices will come down because of this rate cut. In fact, it is very likely that there will be an upward bias on property rates because of the anticipated improvement in sentiments of buyers who have so far been sitting on the fence, waiting for some signals of relief," adds Ahuja.

Shrinivas Rao, CEO, Vestian Global Workplace Solutions says the reduction in repo rate will boost economic growth and improve business sentiments which in turn will strengthen buying activity. However, the impact will vary across sectors depending on implementation of the cut by leading banks.

"Leading lenders are likely to cut interest rates on deposits and loans. Home loans are likely to turn cheaper. For instance, a 25 basis point cut could lower home loan EMIs by Rs 16 per Rs 1 lakh. A cut in the repo rate will also reduce the interest on commercial loans which in turn will favour developers to avail cheaper loans, thereby providing traction to real estate activity. Cheaper loan rates are expected to attract more end-users, impacting the residential sales positively," he says.

With banks offering loans at cheaper rates, developers are likely to prefer the bank loans as against private equity funds. However, an increase in market demand in the short term will drive capital values, thereby benefitting retail investors, adds Rao

According to Ganesh Vasudevan, Vice President and Business Head, IndiaProperty, the cut of 50 basis points by the RBI is a move that will have a positive effect on the real estate segment.

"The cut in the repo rate is going to result in lower rates on loans sooner or later by banks which will make home loans affordable. This has a two-pronged effect-the loan eligibility of the individual increases when the EMI value goes down, plus this comes at a time when revision of salaries is on the anvil," he says.

Localities attracting investments

The affordable housing segment is clearly taking the lead in the market supply in the city. Available in the price band of Rs 40-55 lakhs, the corridors where these housing units have emerged are widespread across the city.

"Bangalore north and established micro locations including Whitefield and Outer Ring Road (Sarjapur) will continue to be the most preferred micro locations for real estate activities and thereby driving investments. Old Madras Road is also expected to emerge as a favoured micro location in the medium term," says Shrinivas Rao.

"Affordable housing has emerged in Electronic City, on Tumkur Road, Bidadi and along the NICE corridor, as well as those places where the Metro connectivity will be reaching," says Ganesh Vasudevan.